Department of Education Must Get Straight With Its Student Loan Servicers - TheStreet

A Government Accountability Office (GAO) study criticized the Department of Education's (ED) performance in overseeing its student loan servicers, the companies it hires to manage and collect the payments of federal student loans. Some 40 million Americans make payments on these loans every month. The November 18 report spelled out the key weaknesses that prevent ED from adequately managing its servicers.

The GAO found that ED gives no consistent instructions to servicers on how to deal with borrowers. As a result, borrowers have no idea what to expect from their servicers. Borrowers are assigned a servicer in a random fashion.

"You could have the same borrower with the same financial circumstances, and they might get completely different advice depending on which servicer they contact," said Melissa Emry-Arras, the GAO's director of education who signed off on the report. "Federal student loan borrowers do not have a choice in which servicer the department assigns to manage their loans."

Existing student loan servicer contracts end in 2019; higher ed experts hope some reforms will be in place by then. Currently, the Big Four loan servicers are Navient (formerly Sallie Mae), NelNet, Great Lakes Education and the Pennsylvania Higher Education Assistance Agency.

A hearing convened last week by Republican House leaders used the GAO’s report to lambaste the Department.

Rep. Virginia Foxx (R-N.C), the ranking Republican on the higher education subcommittee of the House Education and Workforce Committee, called out the office of Federal Student Aid (FSA) for being “rife with inefficiencies that have led to a lack of communication with students, institutions and loan servicers; improper payments; inaccurate reporting of data; failure to ensure borrowers are aware of the repayment options available to them; mismanagement of contractors and vendors; and poor customer service.” The FSA is the ED division responsible for handing out student loans and grants.

An object of the GOP’s ire was James Runcie, the FSA’s chief operating officer. While the FSA's management and leadership were soundly criticized during the hearings, dissatisfaction with servicers has been bi-partisan. Senator Elizabeth Warren (D-Mass.) and other Senate Democrats called in August for an investigation into an ED report that cleared student loan servicers of ripping off military service members and violating the Servicemembers Civil Relief Act. Warren and others believe that military personnel are routinely jobbed by their student loan servicers.

"The Department has had some missteps in its management of the student loan program and has been criticized by the GAO and OIG over those problems," said Mark Kantrowitz, an expert in college financing. "The current five-year plan is focused on addressing these issues. But some of the criticism argues that the Department sets its own goals—and sometimes moves the goal posts.”

There have been innovations, Kantrowitz said, but added that "customer service could be improved, as could the Department's oversight of its contractors."

"For example, the Direct Loan servicers each operates independently of the others, with no sharing of best practices and little guidance from the Department," he added. "There are also opportunities for improved efficiency that have been overlooked. For example, when a borrower's servicer changes, the borrower is forced to sign up for auto-debit all over again. If the Department were to centralize the auto-debit processes, it would eliminate this problem.”

Regularly scheduled payments are deducted from a borrower’s bank account through auto-debit.

Kantrowitz added that "these issues are also attracting attention because of the changing of the guard at the Department of Education."

"Many of the senior management, who had been there for decades, are gone," he said. "Dan Madzelan (a former senior analyst who began with the Carter administration) and David Bergeron (former acting assistant secretary of post-secondary education) retired, and Jeff Baker (current director of policy liaison and implementation) is likely to retire soon. The funding to the Department’s Advisory Committee for Student Financial Assistance (ACSFA) ended, so that committee is no longer around to advise Congress. Many of the people currently in charge are new.” AFSCFA’s funding was cut in October.

In his testimony last week, Runcie claimed that the end of bank-subsidized student loans and the switch to Direct Loans taxed ED's abilities. In 2010, the Obama administration ended government subsidies to banks who acted as middlemen in the federal student loan program. Runcie said that in preparing for the switch to Direct Loans, ED left it mainly to the servicers to decide how they should manage borrowers’ loans, he said.

“In order for us to quickly ramp up, we had to leverage their commercial practices,” Runcie said. "As the department negotiates new contracts for loan servicing, starting in January, the department will standardize common practices among the loan servicers."